United States: Market Trends 2017/18: Registered Direct Offerings

Last Updated: August 15 2018
Article by Anna T. Pinedo

Overview

A registered direct offering is a type of hybrid securities offering, meaning that the offering methodology has certain characteristics associated with a public offering and certain characteristics associated with a private placement. Generically, the term describes an offering made pursuant to an effective registration statement (which may be a shelf registration statement) that is sold on a best efforts, or agency, basis by a placement agent and is marketed in a more targeted manner principally to institutional investors.

In recent years, most issuers that have undertaken registered direct offerings have structured these offerings as "takedowns" made pursuant to effective shelf registration statements. For more information on takedowns, see Market Trends 2017/18: Shelf Registrations and Takedowns and Top 10 Practice Tips: Shelf Registration Statements and Takedowns. Generally, the issuer will retain a financial intermediary to act as the placement agent and enter into an engagement letter. The engagement letter for a registered direct offering will provide that the placement agent will use its best efforts or commercially reasonable efforts to introduce the issuer to investors in order to purchase the offered securities. Unlike the underwriter in a traditional offering, the placement agent has no obligation to, and will not, purchase any of the offered securities. The engagement letter for a registered direct offering also will provide that the issuer will reimburse certain of the placement agent's expenses, including the fees and expenses of its counsel, usually up to a specified cap. The engagement letter will contain standard representations and warranties of the issuer to the placement agent, as well as provide that the issuer will indemnify the placement agent for certain breaches of such representations and warranties, as well as for disclosure-related misstatements and omissions. For more information, see Registered Direct Offerings.

The placement agent generally will wall-cross investors (i.e., inform them of the potential offering, which may constitute material nonpublic information) by obtaining certain confidentiality undertakings from them as well as agreements to refrain from trading in the company's securities for a brief, usually two- to three-day, period. The issuer and its counsel will prepare a prospectus supplement that describes the terms of the registered direct offering. For a form of script relating to wall-crossing, see Investor Wall-Crossing Script and Email Confirmations. For more information on prospectus supplements, see Rule 424 Prospectus Supplements Filing.

Notable Transactions

In 2017, there were a number of registered direct offerings that raised over $100 million in offering proceeds. For example, in 2017, Fortis Inc. raised approximately $382 million in offering proceeds, Agnico Eagle Mines Limited raised approximately $220 million, and Urban Edge Properties raised approximately $155 million. To date, in 2018, there have been a few large registered direct offerings, including an offering undertaken by Wynn Resorts, Limited raising approximately $928 million, and an offering by Algonquin Power & Utilities Corp. raising approximately $353 million in offering proceeds.

Deal Structure and Process

A registered direct offering may be structured in a variety of different ways. In the past, it was common to structure registered direct offerings as "all or none" offerings. This means that the issuer would set forth in the prospectus the number of shares or the dollar amount to be raised in the proposed offering and the offering would only proceed to a closing if the specified amounts had been raised. In an all or none offering, the securities laws require that an escrow account be used to collect investor funds and such investor funds can be released only if the contingency (the threshold amount) has been met. Otherwise, the escrow agent, which must be a national bank, must promptly return the investor funds.

It has become more common to structure registered direct offerings as "any or all" offerings. This means that the transaction will proceed to close even if the proposed maximum offered amount identified in the prospectus has not been sold. In this type of offering, no escrow account is required to be used.

Occasionally, especially in the case of offerings by micro-cap and small-cap companies, registered direct offerings will be structured as "minimum-maximum" offerings, with a stipulated minimum amount that must be raised in order for the transaction to proceed to a closing. This usually is meant to ensure that the issuer has raised the proceeds necessary for its stated use of proceeds. The maximum amount often is identified so that investors understand the total overall dilution that may result from the transaction. In this type of offering, which also is subject to a contingency (i.e., the minimum amount specified being raised), an escrow account also must be used. For a comparison of various types of equity offerings, see Equity Offerings Comparison Charts.

As noted above, almost all of the registered direct offerings completed in recent years have been follow-on offerings, completed as shelf takedowns and marketed on a wall-crossed basis. It is possible to conduct an initial public offering as a registered direct offering, although it is unusual. Similarly, it is possible to conduct a registered direct offering by filing a non-shelf registration statement for the offering, or a bullet registration statement (i.e., a one-time use or single-purpose registration statement), rather than a shelf registration statement. Due to concerns regarding market volatility and possible shorting activity, issuers may be reluctant to file a single-purpose registration statement for a registered direct offering. For forms, checklists, and further information regarding follow-on offerings and shelf offerings, see Follow-On Offerings Resource Kit, Market Trends 2017/18: FollowOn Offerings, Registered Securities Offerings Post-IPO, Top 10 Practice Tips: Follow-on Offerings, and Shelf Offerings.

An issuer may elect to undertake a registered direct offering instead of a private placement or a private investment in public equity (PIPE) transaction if the issuer has an effective shelf registration statement and the issuer believes, or is advised that, it will be able to obtain better pricing by undertaking a registered offering rather than a private placement. Institutional investors may prefer to purchase shares issued pursuant to a registration statement, which will be freely transferable, rather than acquiring restricted securities in a private placement. In addition, since the securities offered in a registered direct transaction are sold pursuant to a registration statement, it is possible for the placement agent to include retail, or non-accredited, investors in the transaction. Usually, participation in a PIPE transaction will be limited to accredited investors. For further information on PIPEs, see Market Trends 2017/18: PIPEs, PIPEs: Drafting Key Documents, Raising Capital Using a PIPE, and Steps for Conducting a PIPE.

An issuer may choose a registered direct offering instead of a firm commitment underwritten public offering that is confidentially marketed if the issuer anticipates that the offering will be relatively small or will be sold to a limited number of investors. The financial intermediary may prefer a registered direct offering, since, in a registered direct offering, it will not undertake any principal risk and there will be no cost of capital associated with its participation in the transaction. Given that a registered direct offering is a best efforts offering, there will be no over-allotment option, or "green shoe," and the placement agent cannot undertake any stabilization activities.

For further information on confidentially marketed public offerings, see Market Trends 2017/18: Confidentially Marketed Public Offerings, Confidentially Marketed Public Offerings: Questions to Ask Before Proceeding, and Confidentially Marketed Public Offerings.

A registered direct transaction will usually constitute a "distribution" for purposes of Regulation M. This means that the placement agent should consider taking the appropriate steps required for compliance with Regulation M restrictions, including observing the applicable Regulation M restricted period, and making the appropriate Regulation M notice filing with FINRA. For further information on Regulation M, see Regulation M.

Offered Securities

Most registered direct offerings completed in recent years have involved offerings only of shares of common stock and, to a lesser extent, common stock and warrants.

Use of a Financial Intermediary

Most registered direct offerings have been completed using a placement agent. An issuer also may sell securities directly to one or more institutional investors pursuant to a registration statement without the services of a placement agent. From time to time, an existing investor may indicate to an issuer its interest in purchasing additional securities of the issuer, or a new investor may approach the issuer or a placement agent on a reverse inquiry basis, desiring to purchase securities of the issuer.

Level of Activity

In recent years, according to a data provider, the level of offering activity has been fairly consistent, generally with a slight upward trend in activity. In 2015, 2016, and 2017, there were 139, 167, and 224 registered direct offerings completed, raising proceeds of approximately $2.47 billion, $2.15 billion, and $3.47 billion, respectively. The average proceeds raised in each offering in 2015, 2016, and 2017 were $15.49 million, $12.88 million, and $17.29 million, respectively.

Industry Insights

The issuers that relied most on registered direct offerings for capital-raising were companies in the healthcare, technology, energy, and industrial sectors. These are sectors in which companies need to access the capital markets frequently and in which companies may face stock price volatility that may cause them to consider relying on registered direct offerings. The market capitalization of the companies that relied on registered direct offerings for their funding varied significantly on a year-to-year basis from 2015 to 2017.

Legal and Regulatory Trends

The issuer will enter into a placement agency agreement with the placement agent at pricing. The agreement will contain representations, warranties, and covenants similar to those that would be contained in an underwriting agreement. The placement agency agreement also will contain requirements to deliver a comfort letter, legal opinions, a negative assurance letter from the issuer's counsel (also known as a 10b-5 letter), and other closing deliverables.

Some investors in registered direct offerings will insist that the issuer make the same representations and warranties directly to the investors. These may be contained in a side letter executed on the pricing date. However, investors cannot enter into a binding commitment to purchase securities from the issuer until a preliminary prospectus with a price range has been delivered to them.

The issuer should consider whether it intends to offer shares in excess of 20% of its pre-transaction total voting shares outstanding and whether the shares to be sold in the registered direct offering will be sold at a discount to the greater of the book value of the issuer's shares or its market price, based on the rules of the securities exchange on which its equity securities are listed or quoted.

Both the New York Stock Exchange and the Nasdaq Stock Market (Nasdaq) rules require that listed companies obtain shareholder approval in the case of certain private placements completed at a discount resulting in the issuance of 20% or more of the issuer's pre-transaction shares outstanding. See 20% Rule and Other NYSE and NASDAQ Shareholder Approval Requirements. Although a registered direct offering is a public offering, for purposes of the securities exchanges' shareholder voting requirements, given the targeted nature of the offering, it usually is not considered a "public offering."

In interpretative guidance contained in IM 5635-3, Nasdaq has indicated that it will consider the following factors in determining whether an offering is a "public offering" for purposes of the shareholder vote requirement:

  • The type of offering, including whether the offering is conducted by an underwriter on a firm commitment basis (generally Nasdaq considers a registered firm commitment offering to be a public offering), or an underwriter or placement agent on a best-efforts basis or whether the offering is conducted by the company without an underwriter or placement agent
  • The manner in which the offering is marketed, including the number of investors offered securities, how those investors were chosen, and the scope of the marketing effort
  • The extent of the offering's distribution, including the number and identity of the investors who participate in the offering and whether there is any prior relationship between the company and those investors
  • The offering price, including the extent of any discount to the market price of the securities offered
  • The extent to which the company controls the offering and its distribution

Nasdaq will also consider:

  • Whether the offering was announced to the public before it was priced
  • Whether the offering was marketed to retail investors
  • The portion of the offering allocated to the largest purchaser

Nasdaq takes the view that if the vast majority of the securities offered were allocated to one investor (or to a group of affiliated investors), it is more likely that the offering price was derived through direct negotiation with the investor rather than through the economics of price discovery attendant to an underwriter's book building process.

In February 2018, Nasdaq proposed amendments to its shareholder approval rule to delete the reference to book value (which feedback from investors suggested was an outmoded accounting concept that did not reflect a security's true value). Instead, an issuer would have to consider whether the proposed offering would be undertaken at a discount to the market price. In addition, the amendments would change the definition of market price for the purposes of the rule from the closing bid price (as the rule currently stands) to the lower of (i) the closing price on Nasdaq.com and (ii) the average of the closing price for the five trading days before the execution of the agreement to sell the shares. The proposed amendments are currently under consideration by the Securities and Exchange Commission.

As a result of the Nasdaq and New York Stock Exchange rules regarding shareholder approval, the issuer may opt to undertake a firm commitment underwritten public offering. The issuer also might choose to limit the number of shares it offers in the registered direct offering to an amount below the 20% threshold. Finally, the issuer might work with the placement agent to structure an offering of common stock and warrants exercisable for common stock that is considered to be priced at the market price and not at a discount.

An issuer that is organized as a master limited partnership should consider that it will be treated as an "ineligible issuer" when it undertakes a best efforts offering (under the definition of ineligible issuer in Rule 405 (17 C.F.R. § 230.405)). This may limit a master limited partnership's ability to use certain free writing prospectuses in connection with a registered direct offering. For additional information on master limited partnerships, see Market Trends 2017/18: Master Limited Partnerships and Top 10 Practice Tips: Master Limited Partnerships. For further information on free writing prospectuses, see Free Writing Prospectus Checklist, Using a Free Writing Prospectus Flowchart, and Timing for Filing a Free Writing Prospectus Checklist.

Other Key Market Trends

Typically, the fees paid to a placement agent in a registered direct offering will be lower than the fees paid to an underwriter in a firm commitment offering. In recent transactions, the placement agency fees have varied from 2% to 6% of the total proceeds raised. In transactions involving micro-cap and small-cap issuers, the placement agent's compensation may include warrants to purchase shares of common stock in addition to the cash compensation.

Many of the recently completed registered direct offerings have been sold to a small number of institutional investors, including hedge funds, pension funds, private equity funds, venture capital funds, and mutual funds.

Market Outlook

During 2018, it is likely that the companies in the same industries (e.g., healthcare, technology, and energy) will continue to rely on registered direct offerings. To date, many of the registered direct offerings completed in 2018 were undertaken by healthcare companies. Given the number of healthcare companies that have completed IPOs in recent years, and the research and development budgets of many healthcare companies, it is reasonable to anticipate that companies in this sector may prove to be the most active users of registered direct offerings as follow-on offerings.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions